Case 14-C In the Matter of a Study on the State of Telecommunications in New York State. Staff Assessment of Telecommunications Services

Transcription

1 Case 14-C In the Matter of a Study on the State of Telecommunications in New York State Staff Assessment of Telecommunications Services Department of Public Service Office of Telecommunications June 23, 2015

2 TABLE OF CONTENTS INTRODUCTION... 1 Brief History of Telecom Regulation in New York... 3 VOICE COMMUNICATIONS... 7 Providers and Service Types... 7 Availability and Adoption... 8 Market Concentration Regulatory Oversight Pricing Service Quality Customer Protections State Universal Service Fund Lifeline Telephone Service Emergency Reporting Entry/Exit Transitional Issues Copper Retirement and Replacement Network Impacts on Emergency Communications Oversight, Cost Recovery & Next Generation VIDEO COMMUNICATIONS Providers and Service Types Availability & Adoption Competition Pricing Regulatory Oversight Rates Service Quality and Consumer Protections Entry/Exit BROADBAND COMMUNICATIONS Introduction FCC and New York State Developments i

3 Provider and Service Types Availability and Adoption Competition Digital Divide Pricing Global Speed Comparisons Regulatory Oversight INVESTMENT & FINANCIAL TRENDS National Key Financial Data Shareholder Returns Credit Ratings Financial Strength Metrics Infrastructure Investment New York State Key Financial Information Infrastructure Investment Cable and Telephone Network Capital Investments in New York State Financial Summary Analyses APPENDIX A: High Level Overview of Public Service Law Jurisdiction & Commission Core Interests APPENDIX B: Pricing Information APPENDIX C: Demographic Drivers of Broadband Availability ii

4 INTRODUCTION This New York State Department of Public Service Staff (Staff) assessment provides a factual overview of the current landscape for communications in New York State, as well as a historical perspective of certain industry and consumer trends. It builds upon past efforts, and seeks to establish a foundation for further dialogue and for the State to determine whether there needs to be changes to regulation, policies and practices to ensure that the communications industry in New York is future proofed to meet the rapidly evolving consumer demands. The last decade has produced radical change throughout the telecommunications industry. Previously, voice and video were distinct services, with different technology platforms, capabilities and benefits. This is no longer true. The Internet and broadband connections to the Internet have emerged as a powerful technology that has disrupted all of the conventional wisdom that governed the mechanisms, business models and regulatory construct for overseeing voice, cable and data communications throughout most of the 20 th Century and until this year, the 21 st Century. Voice service provides the consumer with a telephone number that can be used by other parties to contact them, and enables real-time voice communications and the transmission of sound between two or more users; it also provides access to E911 services. Where telecommunication was previously a terrestrial service provided over copper cable, telecommunication today includes wireline and wireless services, broadband-based services that include over-the-top providers. In addition, along with traditional voice communications, the broadband and wireless networks have also created the emergence of voice and visual communications such as Skype and FaceTime, and has seen the emergence of texting and as further mechanisms for real-time connections. While none of these latter vehicles fall within the traditional definitions of telecommunications, they are indicative of how the emergence of broadband and wireless technologies are radically altering the societal norms of interactive communication. Video service typically provides content with multiple channels, each of which contain different programming and can be switched between at will. Most video services include the retransmission of local television broadcast signals. Where, previously, content services were the exclusive domain of cable companies and the broadcast system, broadband allows the emergence of over-the-top providers (those providing video service on broadband data connections). These allow the a la carte selection of programming, instead of being organized into pre-scheduled channels. Broadband service provides a high-speed, bidirectional connection to the Internet, allowing the user to transmit and receive information such as text, images, audio and video. Broadband services (commonly referred to as ISPs or Internet Service Providers) are commonly used by over-the-top providers to deliver voice and video service. Voice, video and broadband have converged, and each are now available across all technology platforms and offered via copper, fiber, coaxial cable, satellite and mobile networks, as well as by so-called edge providers, such as Vonage and Netflix, which offer voice and video services through a consumer s broadband connection. In the past, consumers interacted with a phone or cable company regarding primarily video or telephone, respectively; convergence has

5 resulted in a given cable or traditional telephone or wireless company being able to provide video, broadband, and telephone services. As this convergence continues, consumers have at their disposal a wide array of services and service providers for their communications needs, albeit at varying technological capabilities and prices. In short, the growth and increasingly important role of broadband has been the most influential trend to emerge from this convergence. Broadband service, which relies upon the same network as telephone, mobile, and cable television, facilitates competition in cable and telephone. Broadband allows consumers to download and stream video content through thirdparty providers such as Netflix, Hulu, and Apple TV, which compete directly with traditional cable video providers. As broadband download speeds increase, offerings like these, and many others, will become more robust and competitive. Additionally, voice over internet protocol (VoIP), the technology behind voice service offerings of cable companies and over-the-top providers like Vonage, Skype and MagicJack, rely on the same network as Internet services, and are increasingly replacing traditional landline telephone services in New York. 1 Over the course of the last decade, more than four million New York State residential and business consumers have adopted VoIP phone service. Since 2000, incumbent telephone company access line counts have fallen from more than 13 million to approximately 4 million. Millions of those incumbent telephone carrier access line losses have been customer migrations of their primary phone lines to VoIP phone and wireless voice service, as well as secondary line migrations from dial-up Internet services, to faster, more advanced cable modem, digital subscriber line (DSL) and optical carrier broadband now offered by most companies providing broadband service in New York State. The rapid evolution of technology spurred by the development of the Internet is profoundly changing the fundamental concept of communication services throughout the world. The very essence of a world-class communications infrastructure in this State depends upon the strength of its evolving broadband networks. Much as telephone was an essential service for consumers in the second half of the 20 th Century, so today is broadband. Broadband service, whether provided by wire, such as cable, digital subscriber line, and fiber optic technologies, or wirelessly via Wi-Fi and LTE cellular technologies, represents not only a communications platform (in the form of voice, text, , video conferencing, and other social media services), but a platform for social relationships, health information, news, entertainment, education, medical diagnosis, the payment of bills, navigation, shopping, government business, document storage, and job applications. Growing from a nascent industry fewer than 20 years ago, broadband has become a service relied upon by millions across the country. New York has experienced this evolution firsthand, as its media production industry, educational institutions, hospitals and healthcare industry, and financial institutions rely heavily on broadband connectivity to deliver services and aid to millions of New Yorkers. 1 VoIP, over-the-top, or nomadic VoIP services are known by these monikers because they are provisioned atop the network facilities of other providers, rather than traversing their own facilities-based networks. Companies negotiate agreements with the facilities-based companies for access onto the networks so as to deliver services to consumers. 2

6 This assessment is organized by major service offerings, namely voice, video and Internet broadband access. Although convergence is challenging the distinction between these services, laws, regulatory policies, and consumers still treat them differently. Given the growing importance of broadband, this assessment particularly focuses on high-speed broadband deployment in New York State and compares speeds to other states and countries. For each of the three major service offerings (voice, video, broadband), the assessment reviews availability of networks and adoption trends, and market concentration levels. It next reviews the Commission s regulatory authority and policies applicable to each of the major services focusing on the following core interest areas: rates, service quality, consumer protections, universal service, emergency reporting and entry/exit. 2 Major regulatory transition issues/trends are also reviewed. The assessment then examines publicly available financial data and infrastructure investment trends for major national wireline, wireless and cable providers as well as similar data for smaller New York based traditional telephone carriers. Brief History of Telecom Regulation in New York The communications landscape in New York State and across the nation, continues its rapid transition to new, more powerful and diverse technologies. Today s networks are providing more advanced and more mobile services at faster speeds to consumers, and supplanting traditional forms of telephone and cable television services. While the Public Service Commission (Commission, PSC) continues to have a primary and overarching interest in ensuring that telecommunications services are available at just and reasonable rates, and are provided in a reliable and adequate manner, the Commission has long supported competitive markets as the most effective approach to ensuring these core interests and consumers evolving needs are maintained. In 1994, the Commission initiated its Competition II proceeding, 3 which articulated its four overarching core principles: (1) ensuring the provision of quality telecommunications services at reasonable rates, (2) where feasible, allowing competition to be the most efficient means to achieve that goal, (3) recognizing that regulation should reflect market conditions, and (4) acknowledging that providers in like circumstances should be subject to like regulations. The legislature has also amended the Public Service Law (PSL) to reflect market trends (e.g., PSL 5(6) was added in 1997 suspending application of the Public Service Law to cellular telephone; PSL 92-g was added in 2013 authorizing the de-tariffing of non-basic retail services). Throughout this transition to more competitive markets, the Commission has attempted to balance the needs of consumers for 2 A matrix depicting the general applicability of the Public Service Law to various providers of voice services, as well as to various providers of video services and broadband services is included as Appendix A. 3 Case 94-C-0095, Proceeding on Motion of the Commission to Examine Issues Related to the Continuing Provision of Universal Service and to Develop a Regulatory Framework for the Transition to Competition in the Local Exchange Market, Opinion No (issued May 22, 1996) (Competition II Order). 3

7 protection from business practices that might endanger their health, safety and welfare against the adequacy of market forces to provide those protections. Where markets do not protect core interests, the Commission continues to act and evolve its regulatory approach. The last time the Commission embarked on a broad review of the telecommunications market in New York was in 2006 with its Competition III proceeding. Therein, the Commission determined that the significant and growing level of intermodal competition from digital cable networks, wireless networks and over-the-top providers reduced the incumbents market power. The Commission found that a lightened regulatory approach for traditional incumbent telephone carriers was warranted and necessary in order to level the playing field and enable them to remain viable providers into the future. The Commission concluded that the residential market for non-basic service was effectively competitive, rejecting claims that for various reasons, such as the assertion that cellular service was not totally substitutable or that VoIP was not generally available, incumbent telephone companies still had market power. The Commission expected to reduce regulation and rely more heavily on market forces to achieve just and reasonable rates, and to maintain adequate service quality. In the wake of its Competition III proceeding, the Commission initiated several efforts to eliminate outdated regulations and provide for pricing flexibility where competition existed. To maintain a basic level of regulatory protection, the Commission required incumbent telephone carriers to offer a "basic service" 4 subject to a regulated price cap. 5 For services other than basic services, with a few minor exceptions, the Commission granted Verizon New York Inc. (Verizon) and Frontier of Rochester, Inc. (Frontier) unlimited pricing flexibility for residential service, subject to service territory price uniformity to protect customers in noncompetitive areas. The Commission also enforces service quality performance standards for areas that were not subject to adequate competition (i.e., white spots ) and for more vulnerable consumers (e.g., Lifeline, elderly and disabled). 6 Subsequent to the Commission s Competition III proceeding, the Public Service Law was amended, in 2013, to authorize the de-tariffing of non-basic, retail residential as well as business 4 Regulated basic services are defined in 16 NYCRR 602.1(b) as the provision of access to: one party line service, local/toll calling, local usage, tone dialing, emergency services, assistance services, telecommunications relay services, directory listings, privacy protections and non-published service associated with the public switched network. 5 See, Competition III Order; Case 07-C-0349, In the Matter of Examining a Framework for Regulatory Relief, Order Adopting Framework (issued March 4, 2008). 6 See, Case 10-C-0202, Verizon Service Quality Improvement Plan, Order Adopting Verizon New York Inc. s Revised Service Quality Improvement Plan with Modifications (issued December 17, 2010). 4

8 services (PSL 92-g). 7 Previously, in 2006, the Legislature also authorized telephone corporations to offer promotional prices for non-basic services. 8 In the cable television market, the Commission has fostered competition through facilitating competitive entry into the video market. 9 Where once there was only a single wireline cable provider operating in a particular franchise area, the competitive landscape has changed markedly over the last decade. For example, over the past ten years, Verizon has acquired 189 cable franchises and is now the third largest cable operator in the State. Over-thetop providers of video services such as Netflix have also emerged. Regarding broadband Internet access, after years of classifying broadband service as an interstate information service, subject to limited regulation under Title I of the Telecommunications Act, the Federal Communications Commission (FCC) recently classified broadband as an interstate telecommunications service subject to common carrier regulation under Title II of the Federal Communications Act. 10 The FCC opted to forbear from many Title II regulations, most notably rate regulation and Universal Service Fund (USF) contributions. In doing so, the FCC also indicated that it would likely preempt states from imposing any requirements on broadband service providers that are inconsistent with its forbearance. The FCC s Report and Order is designed to promote an open Internet and establish net neutrality rules applicable to both wireline and wireless broadband service providers. Those rules ban blocking or throttling of Internet traffic (slowing down the delivery of certain types of internet traffic, like video, in favor of other types), prohibit paid prioritization (allowing a content producer to pay an internet service provider for its content to be delivered faster), and establishes a no unreasonable interference/disadvantage standard (no ISP may discriminate against a given class of users). Thus, in the almost ten years since the Public Service Commission s Competition III proceeding was conducted, the technological evolution in the communications industry has continued. In fact, consumer interests have evolved dramatically. With the growth of high speed broadband services, wireless smart phones, and VoIP technology providing broadband and video in addition to communication services, competition and the convergence of voice, video and broadband has become more robust. The passage of time and changing industry trends, along 7 New York State, Laws of 2013, c. 389, 1, eff. Jan. 19, New York State, Laws of 2006, c. 739, eff. Dec. 19, Case 05-M-0250, et al., Joint Petition of the Town of Babylon, the Cable Telecommunications Association of New York, Inc. and CSC Holdings, Inc. for a Declaratory Ruling Concerning Unfranchised Construction of Cable Systems in New York by Verizon Communications, Inc., Declaratory Ruling on Verizon Communications, Inc. s Build-Out of it Fiber to the Premises Network (issued June 15, 2005). 10 GN Docket No , In the Matter of Protecting and Promoting the Open Internet, Report and Order on Remand, Declaratory Ruling, and Order in, (issued March 12, 2015). 5

9 with the near ubiquitous deployment of wireless and broadband technologies, has again brought the industry to an inflection point. It is against this backdrop that Case 14-C-0370, In the Matter of a Study on the State of Telecommunications in New York State (the Telecom Study), was initiated. The Telecom Study is designed to help the Commission and the State Legislature better understand the dynamic nature of the state telecommunications landscape, to identify areas where there have been market successes, and other areas where there may be market failures or other regulatory opportunities to advance the public interest. Data used in this assessment is derived from a variety of sources including, but not limited to: 1) telephone and cable company Annual Reports filed with the Public Service Commission; 2) Federal Communications Commission reports; 3) United States Census Bureau information; 4) digital map files available from Mosaik Solutions; 5) video, voice and broadband service provider websites; and 6) other Department Staff data sources. 6

10 Providers and Service Types VOICE COMMUNICATIONS Consumers in New York have multiple choices over voice communication, which continues to be provided by 40 incumbent local exchange carriers (incumbent telephone companies or ILEC) throughout New York State. Each company provides services in its own specific franchise territory. Verizon, a former Regional Bell Operating Company, is the largest of the incumbent telephone companies, followed by the aggregate subsidiaries of Frontier Communications, FairPoint Communications, Windstream Communications, and TDS Telecom. The remaining incumbent telephone companies are smaller providers operating in more rural areas of the state. Many of the incumbent and competing telephone companies offer service over the traditional, copper-based telephone network, and others offer service over more advanced infrastructure, such as fiber optic and VoIP based platforms. Cable customers are also able to obtain telephone service from their cable suppliers. Twenty two of the State s twenty nine cable television companies offer VoIP as either part of a bundled package or a stand-alone service. Time Warner Cable is the largest incumbent cable provider, with a service footprint that covers most of upstate New York as well as the Metro New York City region. Cablevision Systems Corporation is the second largest cable company, with service primarily in Long Island, Metro New York City and portions of the Hudson Valley region. The four national, facilities-based wireless companies, AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless, also provide service in New York. In addition, smaller facilities-based companies such as Blue Wireless, and other resellers of wireless services, such as TracFone, Straight Talk, and Cricket Communications provide service in portions of the State. In more recent years, other facility-based providers, along with service providers using the VoIP platforms, have become increasingly prominent in the State. These providers networks interconnect with the incumbent competing telephone company networks, as well as cable television and wireless networks. Over-the-top VoIP providers such as Vonage, MagicJack, Ooma and Skype, are examples of companies that rely on the wired and wireless networks of other providers to deliver service to end-user customers In the early years of local telephone competition, companies such as AT&T and MCI WorldCom, as well as a number of other entrants who relied heavily on access to incumbent carriers unbundled network elements, entered the local market. These providers were referred to as Competitive Local Exchange Carriers or CLECs. As competition from cable television companies and wireless carriers serving as the major competitors emerged, CLECs, many of which still operate as certified carriers in New York, are playing a smaller role in today s marketplace. 7

11 Availability and Adoption According to the most recent (2014) data published by the FCC, 98.0% of occupied housing units in New York State have access to voice service (either wireless or wireline). 12 As indicated in the table below, wireline service by traditional incumbent local exchange carriers remains available throughout the state. Table 1: Voice Service Availability and Adoption 13 Figure 1 depicts cable providers provide wireline voice service to 95% of the State. Specifically, 1,440 of the 1,544 incorporated municipalities in the State have wired cable networks capable of providing voice, video, and broadband (e.g., the Triple Play ) services. Nineteen municipalities have wired cable networks over which voice service is unavailable. These 19 municipalities represent approximately 16,300 households. 14 Eighty five, mostly rural, 12 FCC, Universal Service Monitoring Report, December 2014, Table 6.6, Voice Penetration by State, September 2014 data. We note that the United States Census Bureau defines a housing unit as a house, apartment, mobile home, group of rooms, or a single room that is occupied (or if vacant, is intended for occupancy) as separate living quarters. Separate living quarters are those in which the occupants live and eat separately from any other persons in the building and which have direct access from outside the building or through a common hall. The occupants may be a single family, one person living alone, two or more families living together, or any other group of related or unrelated persons who share living arrangements. U.S. Census Bureau, Household and Person Per Household, 13 This and other tables contained in this document, unless otherwise noted, are derived by Staff from a variety of sources. Availability refers to an estimate of the number of premises that can access the networks/technologies represented. Adoption refers to the subscriptions (residential and business) relative to total household premises (7.3 million) for Local Exchange Carrier (LEC), Satellite, Cable and Over-the-Top sectors, household premises passed (3.6 million) for Fiber, and total New York State population (19.4 million) for wireless. Premises includes households as reported by the FCC based on census data as of December 31, Adoption rates exceed 100% due to multiple household subscriptions. 14 The majority of the households in the video-only cable networks are operated by Charter Communications in Rensselaer and Columbia counties. 8

12 municipalities do not have wired cable networks deployed. 15 In those communities, cable voice service is also unavailable. 16 Those 85 communities represent approximately 30,000 households. In total, approximately 46,300 households in these 104 municipalities lack access to a cable network capable of providing voice service. Additionally, in some municipalities that have cable franchises households that lie beyond the service area of the cable network do not have access to any of the cable services even though they reside in the franchise area. Figure 1: Cable Network Availability 15 The communities of Fire Island, Suffolk County and Kiryas Joel, Orange County, have wired cable networks that provide voice and broadband service, but do not have cable television franchises, and therefore do not offer cable video service in those communities at this time. 16 While there are municipalities in the State without cable television networks deployed, or locations with cable networks that are video-only, it is important to note that every municipality in the State has access to one or more wired or wireless network, capable of providing video, voice and data services to residents and businesses. Satellite video, voice and broadband services, as well as terrestrial wireless voice and data services are widely available throughout New York, as is wireline telephone and data services offered by incumbent local exchange carriers. 9

13 There are currently about 19.4 million residents of New York State, and essentially all have access to multiple wireless service providers. As of year-end 2012, approximately 20.7 million wireless voice customers in New York have adopted wireless service. The Figure 2 map depicts the aggregate voice service coverage of the wireless companies serving the State. 17 We note that there are many areas with overlapping competitive service coverage from multiple wireless service providers; New Yorkers in these areas have anywhere from two to four providers or more for wireless service. The unshaded areas reveal where residents have limited or no wireless service coverage available (mostly forested and very rural areas). Figure 2: Wireless Voice Service Availability 17 The aggregate voice service map is inclusive of all wireless services protocols and standards provided by each wireless company, and the aggregate LTE service map is inclusive of the four national wireless carriers. 10

14 Migration to wireless communications has been a major trend in voice services. Along with the proliferation of advanced personal electronics with improved features and functionality, and the emergence of Wi-Fi hotspots, wireless networks have led to a new era of voice communications. As these networks continue to deploy more advanced technologies, like LTE, consumers are expected to experience greater quality and reliability which could lead to additional future migrations as their primary voice platform. The move to wireless platforms is not limited to wireless cellular networks, however, as cable companies have also begun to offer wireless voice services over their expanded Wi-Fi networks. 18 Over-the-top voice services are also generally available anywhere that broadband or Wi- Fi service (wired or wireless) is accessible to the consumer. Many over-the-top providers offer applications that consumers can download onto their smart phones, laptops, and other portable devices. The emergence of wireless and cable wireline competition has changed consumer behavior with regard to voice services. In terms of adoption, consumers have migrated to competitive network platforms and providers in significant numbers. Traditional telephone companies have lost significant amounts of market share to competitors. Incumbent local exchange companies measure market penetration by access lines. The reduction in the number of incumbent telephone company customer access lines from the year is contained in Figure 3. For context, the chart is overlaid with VoIP and wireless phone connections as well. 18 For example, Cablevision and Time Warner Cable, the two largest cable operators in the state, both offer subscribers access to VoIP phone service using cable company Wi-Fi networks and applications, via Cablevision s Freewheel Wi-Fi voice service and Time Warner s Phone 2 Go Wi-Fi voice service. 11

15 ILEC, VoIP and Wireless Subscription Trend: ,000,000 Competition III Order 15,000,000 10,000,000 5,000, Wireless Phones ILEC Access Lines VoIP Phones Figure 3: Voice Provider Connections in Service, The trend lines indicate that adoption of both wireless and VoIP phone service has occurred rapidly over a relatively short period of time as consumers migrate away from more traditional telephone service. In 2004, the number of wireless phone connections reached the level of the incumbent phone service subscriptions and, from that time, wireless subscriptions escalated rapidly, surpassing the level of incumbent phone service subscriptions which peaked at about 13 million in Similarly, VoIP phone service, which began around 2004, and over the relatively short span of about a decade, has achieved subscription levels that have surpassed incumbent phone subscription levels. Both residential and business customers are migrating away from the traditional telephone company providers, and adopting alternative service providers as detailed in Figure 4. 12

16 14,000,000 ILEC Access Line Trend through ,000,000 10,000,000 8,000,000 * 73% decline in Total Access Lines * 79% decline in Res Access Lines * 61% decline in Non-Res Access Lines 6,000,000 4,000,000 2,000, Total Access Lines Residential Access Lines Non-Residential Access Lines Figure 4: Incumbent Telephone Company Access Line Trends, Consumers are also finding value in voice service provided by over-the-top providers. Broadband service is widely available to New Yorkers, allowing them to adopt over-the-top services that require very little bandwidth to provide voice service. Low-cost over-the-top voice service, combined with a basic broadband connection, makes for a competitively priced alternative to traditional basic telephone service. 19 The trend away from traditional wireline services aligns with both National and State surveys of consumer preference. The most recent National Health Interview Survey on Wireless Substitution, commissioned by the Centers for Disease Control and Prevention, dated July 2014, found that, the number of American homes with only wireless telephones continues to grow. Two in every five American homes (41.0%) had only wireless telephones. In the 2006 Competition III Order (Comp III Order), the Commission noted that 9.4% of U.S. wireless subscribers used a wireless phone as their primary phone. 20 In New York, a November Satellite phone service is also an alternative for consumers who are interested in a supplementary service in remote areas or locations that may have spotty wireless voice service or in the instance where a wired voice service option may be unavailable. Cost, call quality, and reliability could be factors in the lower adoption rate for satellite phone service presently. 20 Competition III Order, p

17 survey conducted by the Siena College Research Institute in New York for AT&T indicated that 28% of upstate households (21% statewide) rely only on mobile wireless for voice service. 21 Market Concentration Staff also analyzed the competitiveness of the New York State telecommunications markets using the methodology set out in the Department of Justice/Federal Trade Commission (DoJ/FTC) Horizontal Merger Guidelines. 22 Those guidelines stem from the premise that as the number of competitors in a market declines, the potential for anti-competitive behavior increases. The Herfindahl-Hirschman Indices (HHI) endorsed by the DoJ/FTC, measure market concentration and recognize the correlation between market concentration and the lack of market competitiveness. Concentration in a market is important because the level of concentration affects the behavior of firms in the marketplace. Greater market concentration is generally associated with behavior in which firms exercising market power seek to push prices above competitive levels. The HHI is calculated by summing the squared market shares of each company providing service in a given market. The DoJ/FTC generally classify the competitiveness of markets into three types: Unconcentrated Markets: HHI below 1500 Moderately Concentrated Markets: HHI between 1500 and 2500 Highly Concentrated Markets: HHI above 2500 Year 2013 customer counts shown above (Figure 3) were used to calculate HHIs for the voice market in New York. The tables below are reflective of statewide average HHIs. Although there are multiple incumbent and cable phone providers in the State, the service territories for these various incumbent telephone providers do not overlap. Similarly, the service territories for most of the cable providers (except mainly for Verizon FiOS and some smaller competitive cable companies) do not overlap. Thus, at any customer location, the analysis below reflects that customers in New York generally have the choice for phone service between an incumbent telephone carrier, a cable carrier, over-the-top VoIP and four primary wireless carriers. The national wireless shares from Table II.C.2 of the FCC s 17 th annual wireless competition report were used as a proxy for New York State wireless company market shares. The lower bound estimate below does not treat Verizon wireline phone service and Verizon wireless phone as being provided from the same entity. The resultant HHI figure of 1,764 falls near the bottom of the DoJ/FTC Guidelines moderately concentrated market range. 21 See, Siena College, Cell Phones Used by 90 Percent of New Yorkers (issued March 4, 2015), 22 See, U.S. Department of Justice, Horizontal Merger Guideline, available at 14

18 Table 2: Voice HHI Lower Bound 2013 This analysis was re-done to combine the incumbent telephone wireline phone with affiliated wireless phone. In the great majority of the State, Verizon is the incumbent wireline phone provider and, thus, Verizon wireless is used as a proxy for the incumbent affiliated wireless phone provider. This upper bound HHI estimate of 2,367 falls close to the top of the DoJ/FTC Guidelines moderately concentrated market range. Table 3: Voice HHI Upper Bound Estimate

19 The range between the upper and lower bound is approximately 650, indicating that the actual HHI for voice service in the state likely falls somewhere within the moderately concentrated market range. The overall HHI of the voice market has changed little from the time of the Comp III order. However, subscriptions have migrated from the incumbent platform to the other platforms, namely VOIP cable and wireless. At the time of Comp III, the incumbent carrier platform was used to provide voice service to well over 30% of the roughly 23 million voice customers in the state (including CLECs that resold voice service using the incumbent s network). Currently the incumbent carrier platform share of the voice service market (including CLECs reselling service) has fallen to roughly 10%. Moreover, the overall size of the voice market has grown to encompass over 29 million voice customers in the state. The tables below represent the lower and upper bound estimates using customer subscriptions in Table 4: Voice HHI Lower Bound 2005 Table 5: Voice HHI Upper Bound Estimate

20 Regulatory Oversight The Commission s regulatory policies and practices over telecommunication providers have evolved with technological changes in the industry. In 1994, the Commission initiated its Competition II proceeding 23 which articulated its four overarching core principles: (1) ensuring the provision of quality telecommunications services at reasonable rates, (2) where feasible, allowing competition to be the most efficient means to achieve that goal, (3) recognizing that regulation should reflect market conditions, and (4) acknowledging that providers in like circumstances should be subject to like regulations. Throughout this transition to more competitive markets, the Commission has attempted to balance the needs of consumers for protection from business practices that might endanger their health, safety and welfare against the adequacy of market forces to provide those protections. While the Commission s decisions rely on competition as a means to ensure that its core interests are maintained, there remain areas where the Commission continues to regulate and monitor the voice market outside of its competitive framework. These areas, discussed below, include pricing, service quality, consumer protections, universal service, emergency communications and entry/exit, as well as network transition and copper retirement. Pricing In April 2006, when the Commission issued its Comp III Order, it established a basic service offering rate cap of $23.00 for flat rate residential service, which at the time was comparable to the various measures of basic phone service market prices and was aligned with the forward-looking costs for providing the basic service, which ranged from $22 to $26. The Commission determined that the $23.00 benchmark reflected a just and reasonable price for basic phone service. Basic residential service remains capped at $23 (not including taxes and fees such as the federal Subscriber Line Charge). The Comp III Order also reviewed national trends in telecommunications service prices, noting that, based on a Bureau of Labor Statistics index of wireline telecommunications service provider prices, national prices had decreased at an average annual rate of 1.8% over the period 1996 to Since the Comp III Order was issued, the national price trend for residential wired telecommunications prices have increased at an average annual rate of 2.9% per year. 24 Using 23 Case 94-C-0095, Proceeding on Motion of the Commission to Examine Issues Related to the Continuing Provision of Universal Service and to Develop a Regulatory Framework for the Transition to Competition in the Local Exchange Market, Opinion No (issued May 22, 1996) (Competition II Order ). 24 Based upon U.S. Bureau of Labor Statistics (BLS) data, residential wired telecommunications prices have gone up at an average annual rate of 2.9% per year since The BLS Producer Price Index for wired telecommunications carriers, residential local telephone service, has a value of in December 2006 and in December This implies a compound annual growth rate of 2.9%. BLS data indicate that the prices for business local telephone service have gone up by an average of 0.6% per year over the same time period. 17

21 the 2.9% rate of inflation as a guide, the $23.00 benchmark for basic phone service, established in 2006, would have increased to about $28.91 by In the Comp III Order, with a few minor exceptions, for residential services other than basic voice service, Verizon and Frontier were granted unlimited pricing flexibility, subject to service territory price uniformity to protect customers in non-competitive areas. This assessment provides a high level review of pricing activity since Comp III. Appendix B shows the pricing trends since 2007 for Verizon s and Frontier s basic residential and residential packages and for basic business individual access line (with and without unlimited local and toll usage). These trends show steady Verizon price increases, especially for business services (roughly 6.0% per year for some services), but it should be noted these trends do not reflect promotional offerings. The assessment also reviews other competitive phone service providers, both regulated and unregulated by the Commission, currently offering a variety of service choices to consumers. A sample of residential and small business phone prices being offered by cable providers, wireless providers and over-the-top providers as of May 11, 2015 is presented in Appendix B. 26 This sample is not intended to provide a comprehensive review of phone service pricing. The examples in Appendix B reveal the challenge of making accurate pricing comparisons among the various competing providers. The phone service market has transitioned towards bundled packages of local, long distance calling, and various complimentary service features, including promotional pricing. Moreover, because phone service is no longer limited to physical service to the home or business, and includes much more than voice service (e.g., texting), it is difficult to compare pricing for these services to basic dial tone. Smart phones and other mobile communications devices bundle data communications with entertainment and other services. Similarly, as noted, cable companies and Verizon s FiOS offering bundle phone services with other network services, mainly video and broadband, often at discounted prices. A sample of residential triple play bundled prices relative to lesser bundles and standalone prices is also provided in Appendix B. Many of the phone service options sampled are priced comparatively lower than the sampled Verizon offerings. Time Warner Cable, for example, offers a stand-alone Home Phone National product for $10 per month for 12 months. The price for that phone service post promotion, if not extended, may rise to $40. Many companies are now bundling phone service with a number of other network services and See, and 25 The FCC s 2015 Urban Rate Survey for Fixed Voice, released April 16, 2015, determined that the reasonable comparability benchmark for voice services is $ We note that there are literally dozens of competitive phone service providers in today s marketplace, offering potential customers various stand-alone or bundled service options. 18

22 enhanced features, resulting in reduced phone service pricing when combined with broadband or video offerings. Time Warner Cable, like many others in the competitive market, also makes special offers to potential customers for lower pricing, generally for an introductory period of time. Another example: Cablevision, which provides service in the Long Island, metropolitan New York City and Lower Hudson Valley regions of the State, offers customers the option to add Optimum Voice World Call service to a package bundle for an additional $19.95 more per month. Comcast Corporation also offers XFINITY Voice Unlimited phone service to new customers for $29.99 for the first six months, with price increases thereafter. Service Quality The Commission s jurisdiction over incumbent and competitive telephone companies service quality also varies depending on a variety of factors. For instance, all incumbent and certified competing telephone providers in New York are required to keep and retain performance records for each metric contained in the Commission s regulation at 16 NYCRR In addition, these companies are expected to meet or exceed the Commission s performance thresholds. Carriers with fewer than 500,000 access lines are only required to report to the Department on their customer trouble report rate (CTRR) performance metrics. Conversely, carriers with more than 500,000 access lines are required to report to the Department on all the service quality metrics. Currently, only Verizon and Time Warner Cable Information Services (TWCIS) have more than 500,000 access lines in New York. 27 However, both these companies have been afforded certain relief from the Commission s broader (i.e., non CTRR) reporting requirements as follows. In December 2010, based on competitive market conditions, the Commission adopted a revised Service Quality Improvement Plan (SQIP) directing Verizon to focus its reporting and performance efforts on what it considered to be the most important service quality metrics: out-of-service over 24 hours (OOS>24) and service affecting over 48 (SA>48) for only its core customers (i.e., residential and business customers without wireline alternatives, customers receiving Lifeline service, or customers having special needs, e.g., medical). 28 Verizon was allowed to cease reporting on the Commission s remaining service quality metrics favoring competitive market conditions to set acceptable levels of service quality where it exists. 29 TWCIS currently reports to the Department on all of the Commission s service quality 27 Cablevision systems has more than 500,000 voice customers in New York State, but holds no CPCN for voice service and no ETC status for the provision of Lifeline phone service. 28 Case 10-C-0202, Verizon Service Quality Improvement Plan, Order Adopting Verizon New York Inc. s Revised Service Quality Improvement Plan with Modifications (issued December 17, 2010). 29 Verizon continues to provide CTRR data, on a central office basis, for all of its phone service customers (core and non-core). It must also collect other data, but it does not report such data. 19

23 metrics. 30 However, upon the establishment of satisfactory baseline reporting, TWCIS would be allowed to report on only CTRR, OSS>24 and SA>48 metrics for core customers on a going forward basis. For all other over-the-top (such as MagicJack), non-regulated VoIP (such as Vonage) and wireless telephone carriers (such as T-Mobile), the Commission s service quality regulations do not apply. Verizon and Frontier, the two largest incumbent telephone companies in New York, are subject to service quality incentive plans. A former Rochester of New York Telephone Open Market Plan 31 was subsequently terminated, but in its place, Frontier is now, among other things, subject to service quality incentives tied to rebates and dividend restrictions. Verizon, if it fails the Commission s OOS>24 and SA>48 performance metrics, is subject to a penalty action under PSL 25, under the SQIP. 32 At the time of the Commission Order adopting Verizon s revised SQIP, the company reported approximately 400,000 core customers and 4.96 million total access lines. As of December 2014, through customer migrations to other services and service providers (including Verizon wireless or other VoIP companies) or other circumstances, the number of core customers remaining on the Verizon s wireline network has declined to less than 200,000, a reduction of about 50%. The following graph demonstrates an improving trend with regard to Verizon s OOS>24 metric for core customers. As can be seen, the trend with regard to this critical repair metric has been improving since the inception of the SQIP in January 2011 and, other than related to periods of inclement weather, the company generally performs better than the threshold for this metric. The trend with regard to the OOS>24 metric for non-core customers is similar. 30 Case 13-C-0193, Petition of Time Warner Cable Information Services (New York), LLC for Waivers of Certain Commission Regulations Pertaining to Partial Payments, Directory Distribution, Timing for Suspension or Termination of Service, and a Partial Waiver of Service Quality Reporting Requirements, Order Granting in Part and Denying in Part Requests for Waivers or Rules (issued October 21, 2013). 31 Cases 93-C-0103, Rochester Telephone Corporation - Restructuring Plan, and 93-C-0033, Rochester Telephone Corporation - Multiyear Rate Stability Agreement, Opinion No , (issued November 10, 1994). The OMP was modified and extended in Opinion (issued March 30, 2000). 32 Case 10-C-0202, Supra. 20

24 Figure 5: Verizon Repair Figures for Core Customers But despite such improvements, in the third quarter of 2013, the Commission identified increasingly poor service quality performance related to Verizon central offices experiencing service inquiry report failures on the individual CTRR metrics for both core and non-core customers. In January 2014, Verizon initiated a Targeted CTRR Remediation Plan, which the Commission accepted. 33 Verizon projects that the work associated with its CTRR Plan will be complete by mid The following chart depicts the average monthly CTRR (blue line) aggregated for all local exchange telephone companies providing service in New York State, as compared to the 3.3 CTRR service standard (red dashed line) pursuant to 16 NYCRR Case 13-C-0161, In the Matter of Quality of Service provided by Local Exchange Companies in New York State, Order Regarding Mediation Plan (issued June 12, 2014). 21